BY MICHAEL HIRTZER
The closure of two ethanol plants this week and proposed sale of a third highlight the growing challenges faced by small producers located far from cheap feedstock supplies in the U.S. Corn Belt, as demand for alternative fuels heads lower.
Profit margins are shrinking across the U.S. ethanol industry, which produces about 15 billion gallons a year of the biofuel mainly from corn, as oil prices have sunk to the lowest in 6-1/2 years. Fuel use overall is slowing as the busy summer driving season winds down.
The biggest producers such as No. 1 Archer Daniels Midland Co and Green Plains Inc said they have benefited this summer from better-than-expected fuel demand as low gas prices have boosted driving. And their plants are in the heart of corn country, where they can rely on ample supplies, sometimes delivered straight from farmers’ fields.
But plants such as those in Wyoming and Virginia that suspended operations this week were built in the ethanol boom years of the 2000s when the promise of increased U.S. government blending mandates could justify the cost of having to buy railcars full of corn from hundreds of miles away. That is no longer the case for some of these “destination” plants.
And demand is falling. With gasoline cheaper than ethanol in some parts of the country, little demand is seen beyond the U.S. government blending requirements that mandate nearly every gallon of gasoline sold in the United States contain 10 percent ethanol.
Ethanol for November delivery on the futures market was trading at $1.43 per gallon while November gasoline was at $1.40 per gallon on Wednesday.
“It’s a difficult environment,” said Andrew Clyde, chief executive of Murphy USA Inc, owner of the 110-million-gallon-per-year Hereford Renewable Energy LLC plant in Hereford, Texas, which is up for sale.
“You’ve got to be performing among the best assets if you’re out of the Corn Belt to be profitable,” he said, adding that the plant was not losing money. “Even in the worst crush-spread environment, we’ve been at least break-even.”
Wyoming Ethanol LLC and Vireol Bio Energy LLC in Virginia were shutting down this week, with Vireol looking for a buyer of its plant. Each facility was the sole ethanol plant in its respective state.
While the loss in production tied to these closures is small – the two plants in Wyoming and Virginia represent less than 1 percent of U.S. capacity – it reflects continuing consolidation in an industry that sucks up about a third of the 13-billion-bushel U.S. corn crop.
“I wouldn’t be surprised to see more,” said a Midwest ethanol trader. “Some of the destination plants will shut down or at least consider it.”
The ethanol industry last suffered a wave of closures when corn prices shot to historic highs in 2012 due to drought.
This time, even large operators in the corn heartland of the Midwest may have to extend seasonal shutdown periods this month if conditions do not improve, industry sources said.
But plants far from the Corn Belt in places like Texas, Arizona and Georgia could be most at risk, they said.
Click here to see more...